Italy & Israel: A Billion-Dollar Offer They Didn’t Refuse

The Israeli Air Force has known since December 2008 that its fleet of A-4 Skyhawk jet trainers and light attack aircraft would leave service. It took until July 2012 to sign a contract for the Skyhawk’s successor, despite justifiable complaints from South Korea that the process lacked full professional formality. The first M-346 Master trainers should begin arriving in Israel around mid-2014, where they will be operated by the IAI/Elbit “TOR” joint venture as a public-private partnership service to the IAF.

Italy’s M-346 eventually beat KAI’s supersonic T-50, thanks to a combination of air force evaluations, geo-political considerations, and countervailing industrial offers. For most countries, “industrial offsets” mean sub-contracting work in their country, sometimes even in sectors of their economy outside of the defense industry. Israel’s weapons industry is far more developed, however, and so their advanced trainer competition saw “industrial offsets” as the purchase of full-fledged Israeli weapons systems. South Korea was already a customer for Israeli radars, UAVs, and missiles, and was seen as the favorite thanks to their relationships and their jet. Italy was a much smaller customer, but relations between Silvio Berlusconi and the Jewish state had been good for a long time. By October 2011, reports surfaced that Italy had made Israel a very impressive offer – one that would make Italy a major export customer for strategic systems, even as it equalized purchases on both sides. In the end, it was an offer the Israelis couldn’t, and didn’t, refuse.

The deal’s components are as follows:

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Deal #1: 30 Israeli T-346A Advanced Jet Trainer Systems($1 billion)

M-346 concept(click to view full)

This is the flagship deal. Finmeccanica describes its value this way:

“The agreement has a total value – including aircraft, engines, maintenance, logistics, simulators, and training – of approximately USD 1 billion, of which approximately USD 600 million pertaining to Alenia Aermacchi.”

The deal will be financed by a consortium that includes Italy’s largest bank, UniCredit, and the Italian Casa pension fund, along with the Israeli Defense Ministry and Bank Hapoalim. Aermacchi will receive the entire purchase price from the financing consortium, while Israel’s Defense Ministry will pay the consortium in 20 annual payments. Ha’aretz describes that total as NIS 6.35 billion, or about $1.71 billion at today’s exchange rates. Bank Hapoalim will be financing 200 million euros of the deal, or about 15.4%.

The M-346 is specified as a supersonic trainer up to Mach 1.2, but it’s not clear if that speed involves level flight. It spun out of a partnership between Finmeccanica and Russia’s Irkut, which split to create 2 advanced trainers on the global market; Italy’s M-346, and Russia’s similar Yak-130.

The collaboration with Russia did ensure that their base design could handle the high angle-of-attack maneuvers which characterize Russia’s high-end fighters, but unlike the Yak, the M-346 hasn’t tested an armed version yet. It comes with a helmet-mounted display as well as the modern “glass cockpit” standard, and was designed to be a lead-in to high-end, front-line fighter jets that included Italy’s Eurofighters, as well as the Aeronautica Millitare’s pending F-35A/B fighters. Israel, who is ahead of Italy in ordering the F-35, reportedly appreciated Alenia’s advance design planning.

The IAF has said that they will make some changes to the jets so they can use Israeli equipment. If this extends to Israeli weapons, in order to enable full weapon training with a variety of bombs and missiles, the M-346 could improve its appeal to other export customers.

Israel will be joining Italy and Singapore as M-346 customers, and the first Israeli M-346 jets are expected to begin arriving in mid-2014. They will be operated by the Israeli TOR consortium, which will then sell flying and training hours to Israel’s Ministry of Defence. On the other hand, TOR itself is a 50/50 joint venture between the state-owned Israel Aerospace Industries, and Elbit Systems. It’s fair to call TOR a public-private partnership, but there’s more state ownership here than meets the casual eye. Alenia Aermacchi is the plane’s designer and manufacturer, but other companies benefiting from the M-346 contract will include:

Boeing (Support, under an international agreement)

CAE (Simulators)

Fiat Avio/Honeywell (F124-GA-200 turbofan engines)

Finmeccanica’s SELEX Elsag (avionics and some communications)

Martin Baker (Mk.16 IT-16D zero/zero ejection seats)

Deal #2: Italy Orders 2 G550 CAEW Aircraft($791 million)

IAF G550 Eitamin Sardinia, 2010(click to view full)

The biggest Italian offset deal involves 2 of IAI’s most high-tech offerings. The G550 CAEW is known as the “Eitam” in Israel, and it has replaced the E-2C Hawkeyes airborne early warning planes flown by Israel and Singapore. Details of the modified Gulfstream business jet’s exact performance are not discussed, but these Conformal Airborne Early Early Warning & Control (CAEW) planes can monitor airspace and even maritime areas for many miles around the aircraft, detecting incoming aircraft, missiles, and even some ships that come within its coverage. IAI also touts the plane’s ability to perform ESM geo-location and identification of enemy emitters like radars, and COMINT interception of communications signals.

Italy is familiar with these planes, which the IAF has flown to a number of joint exercises at Decimommanu AB in Sardinia. They’ll give the Aeronautica Militare an entirely new native capability, as Italy’s sole AWACS assets stem from its participation in NATO’s NE-3A pool. That won’t stop, but the Eitams promise much lower operating and maintenance costs, and more convenient dispatch, while offering similar or greater capabilities.

No firm delivery date was announced, but once the planes are delivered, Italy will join Israel and Singapore as G550 CAEW operators. Chile operates the earlier EL/M-2075 Phalcon system mounted on a Boeing 707, while India’s A-50i mounts its EL/W-2090 AESA Phalcon system on an Ilyushin 76 medium-heavy cargo jet.

Meanwhile, the Italians will be learning more about battlefield targeting and the uses of ground-looking aerial surveillance platforms via their 1-2 year “Net Dragon” contract to lease Lockheed Martin’s Gulfstream-III AML jet. Battlefield targeting is also the subject of contract #3 in this deal.

Deal #3: Italy Orders an OPTSAT ($382 million, split)

OPTSAT 3000 concept(click to view full)

The last component of the deal is a cooperative satellite venture. Finmeccanica’s Telespazio is the formal prime contractor, with a $200 million contract to deliver the sub-contracted OPTSAT-3000 satellite and ground segment, manage launch services, test the satellite on orbit, and then operate it. This brings Finmeccanica’s total orders under these deals to $841 million.

IAI’s share is $182 million, to supply the core Optsat 3000 satellite from their space division. This brings IAI’s total sales in these deals to $932 million.

The OPTSAT 3000’s cameras deliver “high” image quality, and can collect panchromatic and multi-spectral imagery at the same time. It weighs just 400 kg, and its low weight and compact dimensions give it low inertia, hence high agility, which allows it to collect a large number of widely-spread image in one satellite pass. That isn’t coincidence. Because Israel often launches its satellites against the earth’s rotation, in order to ensure that failures land in the sea instead of among its enemies, it places a premium on light weight designs. That helps control purchase costs, too, though there’s a longer-term cost in terms of satellite lifespan. OPTSAT 3000 satellites are based on IAI’s IMPS-II Bus, and are designed for a mission life of “more than 6 years.”

OptSat is seen as a gap-filler, until the Italian-made OpSIS optical reconnaissance satellite becomes operational.

It will be interesting to see how the new satellite affects Italy’s plans vis-a-vis the MUSIS project, which France is trying to push into a multi-national program framework. Adding another capable satellite to Italy’s constellations could make a program to share data among French, German, and Italian ground stations more attractive. On the other hand, it also fields an inexpensive counterpart to France’s recent “CSO” optical surveillance satellites, which could encourage Italy to simply depend on its own resources.